The chief executive of Norway’s US$1.4 trillion sovereign wealth fund says he sees limited scope to dodge a potential inflation shock after warning such a development would hurt both stocks and bonds. 

For Norges Bank Investment Management, the world’s biggest sovereign fund, its sheer size renders it hard to make the reallocations needed to prepare for such a shift, according to CEO Nicolai Tangen.

“We are very long-term investors, and we’re so big it is kind of difficult to move around,” he said in an interview with Bloomberg Television’s Jonathan Ferro on Wednesday. “We are in a way also too big for counterparties.”

Tangen, a former hedge-fund manager who’s been running Norway’s giant sovereign investment vehicle for almost a year, has repeatedly cautioned against expecting continued bumper returns. He says inflation is now emerging as the biggest threat, and that it probably won’t unfold in the same way as in previous cycles.

“We are at a situation now where bond yields are extremely low and the stock market is extremely high and so therefore any major change in inflation will hit both parts of the portfolio,” he said. “In the past, it’s been one and not the other. But this time, both can move in the same direction.”

That’s amid an ongoing debate as to whether price growth is “transitory” or becoming more entrenched. U.S. inflation has been above 5 per cent for the past two months, the highest in over a decade. The fund said on Wednesday that the “strongest performance” of the first half was “in sectors exposed more to inflation, such as energy, financials, materials, real estate and industrials.” What’s more, “the highest returns shifted from growth stocks to value stock.”

Norway’s wealth fund generated a 9.4 per cent return in the first half of the year, with its stock portfolio up almost 14 per cent. Investments in bonds and renewable energy infrastructure slipped, while real-estate holdings grew. Its total return, equivalent to roughly US$110 billion, was marginally higher than that of the benchmark against which it measures itself.

Meanwhile, the fund has been pushing through a broader shift in its weighting to favor North America over Europe, in pursuit of higher returns. On Wednesday, it revealed a 16.8 per cent increase in the value of its technology holdings, which are dominated by stakes in Apple Inc., Microsoft Corp., Alphabet Inc. and Amazon.com. Inc. North American stocks returned 17 per cent in the first half, and made up 45.2 per cent of the equity portfolio.

The fund’s equity portfolio represented 72.4 per cent of total assets at the end of June, which is slightly less than in the first quarter and shows the investor has already had to reduce its stock-market exposure to avoid straying too far from its 70 per cent mandate. Roughly half a decade ago, the fund was mandated to hold just 60 per cent in stocks. 

Created in the 1990s to invest Norway’s oil and gas revenues abroad, the fund delved into renewable infrastructure for the first time earlier this year. The move represents a landmark expansion of the list of the fund’s asset classes, which had been limited to stocks, bonds and real estate.